How will the April 2023 corporation tax rise affect small businesses?

Jeremy Hunt announced that the UK corporation tax rate will rise in 2023 in line with the previous announcement by Rishi Sunak.

The corporation tax rate is scheduled to increase from 1 April 2023. The rate will increase to 25% for companies whose taxable profits exceed £250,000. For companies with profits of less than £50,000, the current 19% rate will still apply.

Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate reduced by a marginal relief such that overall, they will pay on a sliding scale between 19% and 25%.

What is Corporation Tax?

All UK companies must pay Corporation Tax on the profits they generate and submit a Corporation Tax Return.

The profits of non-incorporated businesses (sole traders, partnerships) are taxed via Self-Assessment, not the Corporation Tax process.

Background to the April 2023 changes

The April 2023 Corporation Tax rise was first announced by Rishi Sunak in March 2021 during his time as Chancellor.

Following the strong market reaction to the disastrous Mini Budget, the Government did another U-turn. In October 2022, the then Prime Minister, Liz Truss confirmed that the Corporation Tax rise would go ahead as originally planned.

In this blog, we look at what the Corporation Tax (CT) changes mean for your business and how much small limited companies will pay from April 2023 onwards.

What are the new Corporation Tax rates?

The main rate of Corporation Tax will rise from 19% to 25% in April 2023. Smaller companies will not have to pay corporation tax at the full rate. The rate you pay will depend on your profits for each fiscal tax year.

If your annual profits are at, or below a new £50,000 threshold, the current 19% rate will still apply.

The full 25% rate only applies to companies with annual profits of £250,000 or more.

The Corporation Tax rate system will be much more complicated because between these two rates, a system of marginal relief will apply. This provides a gradual increase in the effective Corporation Tax rate.

What is Marginal Relief?

From 1 April 2023 the Corporation Tax rate changes to:

• 19% for taxable profits below £50,000 (small profit rate)
• 25% for taxable profits above £250,000 (main rate)

Marginal Relief provides a gradual increase in Corporation Tax rate between the small profits rate and the main rate — this allows you to reduce your rate from the 25% main rate.

Who can claim Marginal Relief?

Your company or organisation may be able to claim Marginal Relief if its taxable profits from 1 April 2023 are between:

• £50,000 (the lower limit)
• £250,000 (the upper limit)

If your accounting period is shorter than 12 months these limits are proportionately reduced. Companies whose accounting periods end soon after April 2023 will pay a pro-rated corporation tax rate on a just and reasonable basis.

Associated companies with profits

The upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.

For example, if your company has 3 other associated companies, the limits are divided by 4. The lower limit becomes £12,500 and the upper limit becomes £62,500.

Associated companies can be located anywhere provided they meet the ‘51% group company’ test. Dormant companies are exempt from this rule and holding companies may become exempt depending on the circumstances.

We recommend that you get a review of the associated company position, post 1 April 2023 from an accountant such as dns accountants.

Who cannot claim Marginal Relief?

You cannot claim Marginal Relief if:

• you’re a non-UK resident company
• you’re a close investment holding company
• your profits (including distributions from unrelated, unassociated companies) go over £250,000

Click here to calculate marginal relief for Corporation Tax.

How much will the Corporation Tax increase cost your company?

If your company generates £50,000 or less of annual profits, the current 19% rate will still apply in 2023, and if it generates £250,000 or more the full 25% rate will apply.

However, those companies falling between the lower and upper limits will need to calculate their marginal relief and tax liability to understand what they will pay from 2023 onwards.

Aa significant number of small companies will still pay more tax under the new regime, even if this amounts to just a few hundred pounds per year.

According to the Government, 70% of companies will not pay more than 19% CT during the 2023/4 tax year, and 10% will pay the full 25%.

Working out your Corporation Tax rate

To calculate your Corporation Tax rate, you can use the following method:

Step 1 – multiply your annual profits by the main 25% rate.

Step 2 – subtract your annual profits from the upper threshold (£250,000)

Step 3 – multiply the result of Step 2 by the marginal rate multiplier (3/200)

Step 4 – subtract the result of Step 3 from Step 1 – this is your CT liability for the 2023/4 tax year.

Or use the Governments Marginal Relief Calculator.

How can I minimise my Corporation Tax bill?

Depending on your circumstances there are things you could do before April 2023 to minimise your Corporation Tax liability. This may include:

• Timing of company profits if your year-end falls near 31 March 2023.
• Making capital asset disposals and triggering the gain by exchanging contracts before 1 April 2023 to tax the gain at 19%.
• Shortening the year end to 31 March 2023 if you company accounting period straddles 1 April 2023 and you have significant profits in the early months of the accounting period.

• If you are a loss-making company, carry forward losses to use against future profits.
• Delay any large salary/bonus/pension payments into a later period which will enable corporation tax saving at the higher rate of 25%.

Corporation Tax on chargeable gains

If you sell or dispose of a business asset, you’ll need to pay Corporation Tax on any profits (or ‘chargeable gains’).

When working out your chargeable gain, you can use Indexation Allowance rates to reflect the increase in value of the asset between the time it was acquired and 31 December 2017.

From 1 January 2018, Indexation Allowance is frozen.

If an asset is acquired before 1 January 2018, but disposed of on or after that date, the Indexation Allowance will be calculated using either the:

• Retail Prices Index
• factor for December 2017

This is regardless of the date when the asset is disposed of.

If companies are looking to dispose of chargeable assets, they should consider bringing forward the date of the disposals to before 1 April 2023 to benefit from the lower rate.

Summary

This latest tax increase is yet another burden to UK SMEs. As a result of this corporation tax rate increase, any profits between £50k and £250k will effectively be taxed at 26.5% due to the marginal relief rates as issued by HMRC.

Contact if you have any queries on the Corporation tax rate increase or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.